Sunday, June 8, 2008

Finance ministry dragged to HC over SEZ tax sops

In one of the first cases against the finance ministry's objections on tax exemptions to Special Economic Zones (SEZ) and what could trigger a spate of similar litigations across the country, the Delhi High Court has issued notice to the government on a petition challenging an official circular in this regard.

Directorate General of Export Promotion in the finance ministry had issued the circular in question in April saying service tax exemption cannot be availed if the services were not rendered by the service provider from within the SEZs.

The circular, also meant for implementation by all its field officers, adds that Cenvat credit (on excise duty) will not be available on the inputs used by manufacturers making supplies to SEZ developers.

The petitioners are Jindal Stainless Ltd and its managing director RG Garg. The company is in the process of operationalising a SEZ in Orissa to manufacture and export stainless steel and has already obtained the notification from the government. They said the circular was an erroneous interpretation of the SEZ Act and Rules and therefore was contrary to it.

To support their claims, the petitioner has pointed out that the Section 51 of the SEZ Act has over-riding powers in case of inconsistencies with the provisions including in those contained in any other law.

The court on Wednesday asked the government to file its reply within a fortnight. The petitioners would have to file their rejoinder within two weeks thereafter. The case would come up for hearing by July-end.

According to the petitioner, the only condition in SEZ Act and Rules for availing service tax exemption is that the services have to be used for carrying out the authorised operations (those approved by the Board of Approval for SEZs in the commerce ministry) of the SEZ developer and/or the unit.

However, since services are intangible in nature, there is no statutory condition that services have to be rendered from within the SEZ as specified by the circular, the petitioner added. "The location of the service provider or the place of rendition of service is entirely irrelevant for the purpose of this exemption," they said in the petition, adding that there was no requirement that the service has to be consumed within the SEZ or rendered within the SEZ.

Cenvat credit scheme allows for utilization or refund of input credit for all exports. In this case, sales by manufacturers in the domestic tariff area (DTA, or area outside SEZs) to SEZ developers are treated as exports for which those suppliers can avail tax concessions and input credits. But the circular prevents these manufacturers/suppliers from availing any fiscal benefit.

Tarun Gulati, petitioner's counsel and partner at Economic Laws Practice, said most crucial services such as banking, insurance, accounting, architecture, courier and port services to SEZs operations could be rendered without being physically present in the SEZ. "People have invested thousands of crores in setting up SEZs on the basis of tax benefits promised by the government. Therefore, the finance ministry's move to take away those benefits is unfair," he said.

Moreover, the petitioner claimed that the issuance of such a circular is not within the jurisdiction of the DG (export promotion). If any circular has to be issued, it can be done only by the CBEC, and that too it can only be beneficial in nature, they added. For such drastic changes like taking away tax exemption, the government will have to go in for an amendment of the SEZ Act itself, they said.

Finance ministry has been against giving tax breaks to SEZs saying it would lead to huge revenue losses. Citing a study, it showed that the revenue drain would be to the tune of Rs 102,621 crore from 2006-07 to 2009-10. However, the commerce ministry (the nodal ministry for the SEZs) says the revenue loss estimates are notional.

The total incremental investment in the SEZs so far is over Rs 70,400 crore. The government has set a target of Rs 1,25,000 crore for exports from SEZs for 2008-09, an 86% increase over the last fiscal. During 2007-08, shipments from the tax-free enclaves have been projected at Rs 67,088 crore, an increase of 200% in two years. The zones have generated employment for over 2.8 lakh people. The commerce ministry has so far given formal approval to 467 SEZ proposals, of which 225 have been notified so far. The newly notified SEZs are providing direct employment to 97,993 people.

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